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Palestinian government debt hurts citizens

Cash crunch caused by drop in foreign aid

By Karin Lauband Mohammed Daraghmeh Associated Press

Posted:
08/18/2012 10:57:33 PM MDT

Updated:
08/18/2012 10:58:20 PM MDT

RAMALLAH, West Bank -- Palestinian drug importer Ghassan Mustaklem says he can't afford to work with the West Bank's Palestinian government anymore. He recently halted supplies to his biggest client, which now owes $12 million in unpaid bills, or more than half his annual turnover.

The cutoff by Mustaklem and other suppliers has fueled a shortage of key drugs in Palestinian hospitals, making the health sector the latest victim of a deepening financial crisis for the Palestinian Authority.

The cash crunch, mainly due to a sharp drop in foreign aid since 2011, is threatening to set off a chain reaction of business failures, layoffs and economic downturn that would undermine one of the West's fundamental strategies toward resolving the Israeli-Palestinian conflict.

Some warn that the Palestinian Authority, key to negotiating and implementing any future peace deal with Israel, will not survive without a major infusion of cash.

The authority, though strapped for cash in the past, is in what economists describe as the worst crisis in its 18-year existence. In recent months, it has been struggling to meet its costliest obligation -- salaries for 150,000 civil servants and security personnel which devour half the government's budget of nearly $4 billion.

Unlike in previous crises, the authority can no longer borrow to ease the pain: It already owes more than $2 billion to local banks, private companies and the public pension fund, said economist Samir Abdullah.

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In a further blow, it has received only half the needed foreign aid to close a 2012 budget deficit of $1.2 billion, the Finance Ministry says.

The World Bank noted in a recent report that government spending and spending by government employees were important drivers of growth in recent years.

"A lack of confidence in the government's continued ability to spend could have serious consequences for investor confidence and eocnomic growth," the bank said.

"If there is no reversal in the current trend, the Palestinian Authority will not survive this year," predicted Abdullah, a former government minister. The current finance minister, Nabeel Kassis, hasn't been as specific about the timing, but warned last month that at some point the debt-ridden government would just become too feeble to continue.

For more than a decade -- ever since Israel sharply restricted Palestinian trade and movement following the outbreak of the second uprising in 2000 -- the Palestinian Authority has had to rely on foreign aid to close a budget gap.

It managed to reduce the shortfall, from half the budget in 2008 to less than one-third last year. But Palestinian officials say major donors have been withholding aid, some as a means of apparent political pressure.

For example, the Palestinians had counted on $200 million from the U.S. in budget support in June, but the money hasn't come through yet. The payment was held up by Rep. Ileana Ros-Lehtinen, R-Fla., the chair of the House Foreign Affairs Committee, who is seeking more information about the funds, according to a congressional source.

Lehtinen's office and the committee declined to comment publicly about the hold.

The 2011 payment was delayed by a congressional hold, in part over Palestinian President Mahmoud Abbas' appeal to the U.N. to recognize "Palestine" in the West Bank, Gaza and east Jerusalem, territories Israel captured in 1967. The U.S. and Israel say a Palestinian state can only be set up through negotiations, but talks ran aground in 2008.

The United Arab Emirates cut aid from $174 million in 2009 to $42.5 million since the beginning of 2011 -- according to Palestinian officials in an attempt to pressure Abbas to reinstate a disgraced former aide, Mohammed Dahlan.

Qatar, another rich Arab state, has linked aid to elusive reconciliation between Abbas and the Islamic militant Hamas, which seized Gaza from him in a violent takeover in 2007 and has set up a separate government there.

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